JPMorgan says bad corporate loans pose main risk for Brazil banks

SAO PAULO Oct 16 (Reuters) - A deterioration in the quality
of corporate loan books poses the most obvious risk to Brazil's
largest listed banks, which are wrestling with the nation's
steepest recession in a quarter century, JPMorgan Securities
said on Friday.

In a report, analysts led by Saúl Martínez said the nation's
top banks are working actively with debt-laden borrowers to ease
terms of their credit in order to improve loan affordability,
while simultaneously asking for more guarantees. Their
assessment was based on talks with industry players.

Such a move comes as banks seek to mitigate the earnings
impact of worsening corporate balance sheets, with the country
sinking into a recession, a corruption probe at state firms and
plunging confidence magnifying the current crisis. At this
point, Martínez said, "a small number of loans can have a big
impact" on loan-related losses at banks.

"Unexpected losses can be greater for corporate loans given
that average exposures to specific borrowers are much larger,"
the report said. "This is relevant as signs of financial strain
in the Brazilian corporate sector are appearing."

His remarks underscore the uncertain outlook facing
Brazilian banks. Brazil's economy shrank in recent quarters and
is slated to contract this year and next, the first back-to-back
annual declines since the 1930s.

Industrial output, retail sales and capital spending
indicators have all tumbled over the past two years, with no
sign of relief in the near term.

According to the analysts' estimates, if 10 percent of the
loan balances of the top 100 borrowers were lowered from
non-risk to risky categories, annual bank earnings would fall
between 11 percent and 25 percent.

State-controlled Banco do Brasil SA, the nation's
largest by assets, appears more vulnerable to a turn in
corporate credit quality than private-sector rivals Itaú
Unibanco Holding SA and Banco Bradesco SA.
Banco do Brasil also has a greater exposure to higher-risk
industry groups than the latter banks, the report added.
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